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TriQuint and RFMD: A Merger of Equals?

Redefining market dynamics, leading semiconductor manufacturer TriQuint Semiconductor, Inc. (TQNT) has inked a definitive agreement to merge with rival RF Micro Devices Inc. (RFMD) in an all-stock transaction. The deal, valued at approximately $1.6 billion, is termed as a merger of equals. The combined entity is likely to create a behemoth in the semiconductor manufacturing industry offering vital components to premier mobile companies like Apple Inc. (AAPL) and Samsung Electronics Co. Ltd.

The Deal

Under the terms of the agreement, TriQuint shareholders will receive 1.675 shares of the combined entity, while RFMD shareholders will receive a single share for every share held. Post-merger, the companies will execute a one-for-four reverse stock split to create approximately 145 million outstanding shares.

Former shareholders of both the companies are likely to own 50% shares each of the combined entity. The transaction, at an implied price of $9.73 for each TriQuint share, represents a 5.4% premium based on its closing price of $9.23 on Feb 21.

Key Takeaways

With annual revenues of about $2 billion, the combined entity will bring under a common platform all the critical radio frequency (RF) components that are essential for fabricating mobile devices, thereby creating an undisputed market leader with a diversified product portfolio. These include power amplifiers (PAs), power management integrated circuits (PMICs), antenna control solutions, switch-based products and premium filters.

This in turn will likely offer better bargaining power and make it harder for customers such as Apple and Samsung to push back on pricing. With global smartphone users predicted to triple to 5.6 billion by 2019, the merger provides a huge revenue-generating potential to the new entity.

At the same time, the merger strengthens the combined company's ability to better serve the infrastructure and defense/aerospace industries with advanced gallium nitride (GaN) solutions for additional markets and applications, and foundry services to support radar, next generation base stations, optical communications and the Internet of Things. The newly formed entity is also expected to be a leading player in this sphere with approximately $500 million in annual revenues.

In addition, the merger will offer synergistic benefits and increase the profitability of the new company through economies of scale and mutual sharing of manufacturing expertise, research and development costs and adjustment of staffing expenses. The transaction is expected to generate $75 million of cost savings in the first year of its operation, followed by another $75 million in the second year. Post- merger, the deal is also expected to be accretive to non-GAAP earnings in the first full fiscal year of its operation.

With a broad product portfolio and improved operating model, the merger is likely to create new growth opportunities in three large global markets, namely, mobile devices, network infrastructure and aerospace/defense. The merger is expected to benefit the overall industry as well with technological innovations leveraging on a huge talent pool and combined resources. The combination will also offer higher data throughput for the overall benefit of carriers and consumers alike.

The Critics

However, TriQuint’s decision to merge with RFMD has stirred up a hornet’s nest as to whether the proposed deal is made in the best interest of TriQuint’s shareholders. As such, Robbins Arroyo LLP, which represents individual and institutional investors in shareholder rights litigation, is investigating the transaction to find whether TriQuint is undertaking a fair process to obtain maximum value and adequately compensate its shareholders.

In the fourth quarter of 2013, TriQuint had recorded healthy year-over-year increases in net sales and margins. Net sales increased 15% year over year to $267.7 million. On an end-market basis, quarterly revenues in the Mobile Devices market improved 26.2% year over year to $190.0 million driven by healthy demand for new LTE (Long Term Evolution) products and a significant product ramp up in the quarter.

During 2013, TriQuint introduced 190 new products, strengthening its strategic position in the RF industry. The company recorded less revenues from lower margin products, including commodity power amplifiers and transmit modules as it focused more on high-margin products. Sales of high-margin products increased 36% in 2013 (growing faster than the overall market) due to solid demand for premium filters and high-performance broadband amplifiers.

Given the impressive numbers, it is believed that TriQuint could well have prospered on its own instead of merging with RFMD. In addition, a premium of just 5.4% is argued to be substantially below the average one day premium of nearly 51% for comparable transactions in the past three years. TriQuint shareholders possess the right to file a lawsuit to ensure that the board of directors obtains the best possible price for its shareholders.

To Conclude

Whether the transaction is made in the best interest of shareholders or not, it surely has led to industry consolidation with pricing becoming more rational. It can lead to more of these transactions in the near future as rivals like Skyworks Solutions Inc. (SWKS) and Avago Technologies Limited take stock of the situation.

Meanwhile, TriQuint’s share prices soared 26.1% on the news to close at $11.64, while that of RFMD rose 21.0% to $7.03. The transaction is expected to close in the second half of 2014 subject to the fulfillment of mandatory regulatory approvals.